Detailed Scheduling and Planning (Lesson 4)

Detailed Scheduling and Planning Un

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Unit 2

Detailed Scheduling and Planning

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© Copyright Leading Edge Training Institute Limited ii


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© 2004 e - SCP -The Centre for Excellence in Supply Chain Management No portion of this publication may be reproduced in whole or in part. The Leading Edge Group will not be responsible for any statements, beliefs, or opinions expressed by the authors of this workbook. The views expressed are solely those of the authors and do not necessarily reflect any endorsement by The Leading Edge Training Institute Limited.

This publication has been prepared by E-SCP under the guidance of Yvonne Delaney MBA, CFPIM, CPIM. It has not been reviewed nor endorsed by APICS nor the APICS Curricula and Certification Council for use as study material for the APICS CPIM certification examination. The Leading Edge Training Institute Limited Charter House Cobh Co Cork Ireland

© Copyright Leading Edge Training Institute Limited iii


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Preface............................................................................................................4

Course Description................................................................................................................. 4 Lesson 4 – Basic MRP Logic...........................................................................5

Introduction and Objectives.................................................................................................. 5 Material Planning Process..................................................................................................... 5 MRP Design Features ............................................................................................................ 6 Operation and Performance of Material Planning Process............................................... 8 MRP Mechanics.................................................................................................................... 10 Starting Requirements for MRP......................................................................................... 11 MRP Grid.............................................................................................................................. 11 Low-Level Codes .................................................................................................................. 12 MRP Calculations ................................................................................................................ 14 Gross Requirements of Independent Demand from the MPS ......................................... 14 Bill of Material for items A and F....................................................................................... 16 Gross Requirements of Independent Demand for Service Parts ..................................... 16 Inventory Status ................................................................................................................... 16 Net Requirements and Planned Orders ............................................................................. 17 Lower Level Gross Requirements – Level 1...................................................................... 17 Level 1 Gross Requirements................................................................................................ 20 Determining Level 1 Net Requirements and Planned Orders ......................................... 20 Level 2 Gross Requirements................................................................................................ 22 MRP Exercise ....................................................................................................................... 24 Summary ............................................................................................................................... 27 Further Reading ................................................................................................................... 27 Review ................................................................................................................................... 28 What’s Next? ........................................................................................................................ 29

Appendix.......................................................................................................30 Answers to Review Questions .............................................................................................. 31

Glossary........................................................................................................33

© Copyright Leading Edge Training Institute Limited 4


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Preface

Course Description This document contains the fourth lesson in the Detailed Scheduling and Planning unit, which is one of five units designed to prepare students to take the APICS CPIM examination. Before completing the Detailed Scheduling and Planning unit, you should complete the Basics of Supply Chain Management unit or gain equivalent knowledge. The five units that cover the CPIM syllabus are:

Basics of Supply Chain Management

Detailed Scheduling and Planning

Master Planning of Resources

Execution and Control of Operations

Strategic Management of Resources

Please refer to the preface of Lesson 1 for further details about the support available to you during this course of study.

This publication has been prepared by E-SCP under the guidance of Yvonne Delaney MBA, CFPIM, CPIM. It has not been reviewed nor endorsed by APICS nor the APICS Curricula and Certification Council for use as study material for the APICS CPIM certification examination.



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Lesson 4 – Basic MRP Logic

Introduction and Objectives This lesson examines in detail the logical processes involved in material requirements planning (MRP). Beginning with the system inputs, the processing steps are explained through a progression of worksheet examples and exercises, showing how each input factor affects MRP processing and how the MRP outputs are calculated.

On completion of this lesson you will be able to:

Identify components of an MRP spreadsheet

Detail initial requirements for the planning process

Perform the netting process for a given MRP record

Explode a set of MRP records to produce a complete material plan

Explain the characteristics and workings of a rolling schedule

Describe the necessity for low-level codes

Explain how low-level codes are used

Identify alternative techniques for handling various planning factors

Material Planning Process Material requirements planning (MRP) is a set of techniques or system that uses bill of material (BOM) data, the master production schedule (MPS), and inventory data to calculate requirements for materials and make recommendations regarding purchases.

MRP has been the most widely implemented large-scale production management system since the early 1970s. It originated in the early 1960s in the U.S. as a computerized approach for the planning of materials acquisition and production. Previously, MRP was practiced manually at more aggregated levels. Using computers, the technique can be applied in more detail making it more effective for the planning and management of material.

Originally developed for companies with highly engineered assembled products, it is now the most widely used material planning system in businesses involving chemical, pharmaceutical, food, service, heavy industry, remanufacturing, and complex processes.

MRP Model

MRP takes several inputs and converts them by means of logical processing, into useful outputs that are essential for further planning.

The inputs include:

Sales and Operations Plan

Master Production Schedule

Material Requirements

Planning (MRP)

Purchasing and Production

Activity Control (PAC)

Business Strategy Plan

Master Plan

Planning

Implementation

Sales and Operations Plan

Master Production Schedule

Material Requirements

Planning (MRP)

Purchasing and Production

Activity Control (PAC)

Business Strategy Plan

Master Plan

Planning

Implementation



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MPS - The anticipated production schedule for all BOM or inventory purchasing components that are assigned to the master scheduler.

Bill of Material (BOM) for every parent item - A list of all the components and their quantities that are needed to assemble a finished product.

Inventory status information for every part - A statement of physical stock on hand, material allocated or released to orders but not yet drawn from physical stock, and scheduled receipts.

Planning data – This includes lead-time, scrap factors, lot size, and safety stock.

MRP then converts this information into a schedule of planned purchase order releases to suppliers, an internal schedule of planned work order releases, and a series of action notices.

Schedule of Planned Order ReleasesMPS

MRP

BOMs

Inventory Status

Planning Data

Schedule of Planned Production Order Releases

Action Notices

Schedule of Planned Order ReleasesMPS

MRP

BOMs

Inventory Status

Planning Data

Schedule of Planned Production Order Releases

Action Notices

Functions of MRP

MRP helps in the planning and control of inventory. It determines the items required, the quantities required, and the dates on which they should be ordered, ensuring that orders are released on an appropriate date to ensure required due dates are met. It also ensures that the due dates are valid when circumstances change. It provides a schedule of planned production order releases that can be used in capacity requirements planning and constraint management.

The principal functions of MRP are:

To plan and control inventories

Plan and control work order and purchase order releases

Provide accurate planned order loading for capacity requirements planning (CRP)

MRP Design Features

Planning Horizon

The length of the planning horizon is influenced by the cumulative lead times of the items being planned. MRP must plan further into the future than the longest cumulative lead time of the planned items.

MRP works by predating or offsetting the order release date for an item from its due date by the lead time for that item. If the planning horizon is too short, MRP may generate order releases for past dates at the lowest level. With multilevel product structures, the effects of lot sizing and successive lead-time offsetting lead to a loss of horizon. The explosion of



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the bill of material tends to diminish the planning horizon as MRP progresses from the parent level to the next lower one.

Short planning horizons prohibit the application of some lot-sizing techniques and limit capacity requirements planning (CRP) for lower leve l items, such as fabricated parts, where CRP often provides most benefit.

Over- long planning horizons lead to wasted effort as, generally, the further into the future we plan, the greater likelihood that unexpected events will make the plan unviable.

Time Buckets

With MRP, time is typically represented as a series of weekly intervals or buckets, although the unit of time can be hours, days, weeks, or months. In most manufacturing processes, the units of time are in weeks at the general MRP level and in days at the shop floor level. The master production schedule (MPS) and MRP are usually run weekly so as to have a new set of information every week for the agreed time span.

Usually the MPS has a time span of between 12 and 18 months. The first 13 weeks are detailed and fixed, whereas the next 13 weeks are flexible and not as detailed. The next time period and beyond are very flexible, usually in intervals of months.

Occasionally, the use of weekly buckets can lead to undesirable discrepancies such as the delivery on Thursday of material required for an order the previous Tuesday. In such cases, a bucket-less system may be used where the time-phased data is displayed as dated records rather than buckets. Alternatively, planners may decide to use daily buckets for the first several days, weekly buckets for the next few weeks, and monthly buckets for the rest.

Frequency of Replanning

As there are continual changes to inventory status and therefore material requirements, it is important to run MRP frequently to ensure all changes are taken into account and that the plan remains valid. Sometimes there are frequent small changes, leading to constant material plan changes, which cause disruption to planners, vendors and production floor. This is sometimes termed nervousness. It may be caused by changes in the MPS, supplier deliveries, item quality, order quantities, safety stock requirements, lead times, design, safety, data mistakes and unplanned transactions.

Dynamic production environments demand frequent replanning but this may also cause nervousness: changes in higher level MRP planning lead to many changes of time and quantity on lower level item requirements.

Firm Planned Orders

It is up to the planner to judge whether the changes in the replanned MRP are significant enough to warrant action. A useful way to suppress MRP nervousness is to use firm planned orders. MRP recalcula tes planned orders as net requirements change. Sometimes it may be preferable to hold a planned order firm against changes in quantity and time. For example, some suppliers will not allow changes to orders close to the due date.



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The due date, release date and order quantity of firm planned orders in MRP cannot be changed unless the planner authorizes the change. In addition, MRP does no t allow another planned order for that item to exist in the same time bucket. The firm planned order is therefore fixed against MRP logic and may be used as a tool for manipulating load, beating prices increases and adjusting orders to compensate for shutdowns or other events.

Firm planned orders may be completely firm or only partially fixed. For example, in an organization where recent inventory checks have revealed mistakes related to inventory levels in the MRP system, a firm planned order may be fixed in quantity only, to override the MRP suggested order.

Pegging

Pegging, or ‘where-used’, analysis is used to identify the source of requirements. It is a feature of MRP systems allowing the planner to trace requirements for low-level products up through the product structure to determine the originating requirement for the parent product.

For example, the demand for hinges in a furniture-making company is analyzed and reveals that 30% of the demand is for pine kitchen dressers, a further 40% is for fitted kitchen cabinets, 20% is for bedroom cabinets, and the final 10% is for free standing blanket boxes.

Pegging is useful to determine what orders will be affected if supplier delivery for a particular component or item will be late. This will help the planner prioritize critical orders and channel the available parts to those orders.

1. Which of the following is NOT a function of MRP?

A. To plan and control inventories

B. To plan and control work orders and purchase orders

C. To schedule operations Review Q D. To provide accurate loading information to the CRP system

Operation and Performance of Material Planning Process MRP should be easy to use, with a simple data entry process involving the fewest possible keystrokes per transaction. Bar coding can be useful to speed up data entry and reduce the possibility of data entry errors.

More recently, MRP systems have tended to follow the client-server model in computer system architecture. Client-server MRP systems exist on a computer network. All data is maintained in a central database on the server, which is usually a powerful machine maintained in a secure physical location.

Client

Client computers on the network have electronic access to this data, allowing them to view the data, add data, modify and perhaps delete data. However, all clients are modifying a single central data repository. No data is stored on the client computer. Clients act as an interface



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between user and server, processing requests for information retrieval or storage. They are usually located on computers near workstations. Although not concerned with the actual storage of data, clients usually do some data processing, for example:

Interpretation or translation of user requests into a format understood by the server computer

Verification of user identity and authorization level prior to forwarding commands to the server

Validation of user commands: for example, not allowing a user to enter an order quantity that falls outside lot-sizing regulations for a particular item.

Server

The server is a passive repository of information. It responds to requests from client computers. Ideally, the server provides a standardized transparent interface to clients so that the client computer does not need to be aware of the specifics of the system (hardware and software) providing the service. The server is usually physically accessible only to IT support staff and is often protected by an uninterruptible power supply (UPS) system to ensure that data does not become lost or corrupted.

Performance Characteristics

The MRP system should be constantly monitored, comparing MRP plans with actual execution. MRP reports delinquencies of allocated, gross requirements; scheduled receipts; and projected available and planned order releases for each item. From these, the planner may generate reports of deviations from plan and the causes of those deviations. In addition, item inactivity, inventory investment, and purchase commitments may be used to measure MRP performance.

To measure MRP performance it is necessary to:

Set clear objectives for the MRP system

Allocate resources to the measurement process

Assign responsibility for measuring MRP

Measure performance accurately

Identify and correct the causes of problems

Reward success

Learn from all successes and failures

There are many metrics that can be used to measure MRP performance. In any given situation, the aims and objectives of the company will help to determine the most effective metrics. Some ways in which MRP performance may be monitored include the measurement of:

Orders without shortages Orders released on time

Due dates met Late start dates

Time spent waiting for materials Rescheduled orders

Actual and planned order lead times Number of orders expedited

Action message trends Actual and planned stock levels



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MRP Training

By doubling the amount of money spend on training in MRP procedures, can result in a return on investment of up to four-to-one. This is because employees are more likely to understand the workings of MRP and its significance to the whole company. They are more confident and more likely to take risks, experiment, and attempt problem resolution. Those at management level and those with particular responsibility for MRP need intensive training.

A first step to devising an MRP training programme is to evaluate existing employee skill sets. Then, the desired skill set for each level of employee with respect to MRP should be determined by management and HR. It is important that each employee understand the benefits of MRP to the company and the impact of their own personal inputs to the overall system. It is vital that employees enter data accurately and on time. Company processes, transaction forms, and relevant examples should be used to help employees understand the benefits of MRP. Training employees can lead to them assuming greater personal ownership of the system.

An essential part of training in MRP is to make employees aware of the need for problem-solving and innovation. They should understand the importance of finding problem causes and developing solutions to those problems to prevent them occurring again. The training should be a hands-on approach supported by the use of system specific transactions where employees ‘learn by doing’ in a controlled environment.

MRP Mechanics The starting point for MRP is the plan for satisfying independent demand, which is derived from the MPS. The MPS can be thought of as the plan for the demand for products. Production planning must balance what the company has with what it can produce. Materials and capacity must be sufficient to meet demands.

The material in a company’s products cannot exceed the component material the company has to work with. A balance must be reached between component material and demand material. This requires balance of both capacity and material. Production planning is concerned with ensuring balance of capacity and material. How and when these balances are reached depends on the manufacturing environment. Sometimes material is wholly independent of capacity and other times it is not. When capacity and material are independent of each other, it does not signify whether capacity or materials are planned first.

Material requirements planning valances materials, by planning for all components and raw materials needed to satisfy the MPS. MRP calculates the items, the quantities, the due dates and, when lead times are factored in, the order release dates, required to fulfil the MPS.

The second job MRP must handle is that of material planning maintenance. In a constantly changing environment, where deliveries and work orders may be delayed and inventory records may be inaccurate, MRP must maintain a valid plan with valid quantities and due dates. The MRP planner uses due dates to establish an order of priority for the jobs on hand. MRP advises the production planner when orders should be changed, expedited or delayed to meet required due dates.



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Starting Requirements for MRP The starting point for MRP is the MPS, accurate inventory data and a bill of material for each item produced by the company. The inventory data must provide information of item counts on hand, on order and allocated.

MRP cannot function effectively if any of the inputs are missing. It is also essential that the information is accurate. The old computer adage of "garbage in, garbage out" is very true in the case of materials management systems.

If transactions or data are entered incorrectly at any point in the process, the results can be both embarrassing and costly. The importance of having accurate data at every stage of the process cannot be over stressed.

MRP Grid The MRP grid records such information as the order quantity, the safety stock, allocated quantitative, low-level code and lead time for an item along with the gross requirements, scheduled receipts, projected available inventory, net requirements, planned order receipts, and planned order releases for that item in each time bucket or time period in the planning horizon.

Figure 1 Example of MPS

MRP uses the MPS information (see the example above) on products required along with a bill of material for each product to calculate the amount of each inventory item required. It then compares this against the available inventory records to calculate how much of these items are available and how much must be manufactured or purchased. An example of a multilevel bill of material is shown below:

Figure 2 Example of a multilevel BOM

Chair 100

Chair 100

Base 200

Base 200

Seat 622

Seat 622

Back 500

Back 500

Legs (4) 201

Legs (4) 201

Braces (2) Braces (2) 203

Frame 629

Frame 629

Seat Pad 631

Seat Pad 631

Brace 512

Brace 512 Supports (5)

545 Supports (5)

545

Arms (2) 570

Arms (2) 570



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Each of the items at the lowest level must be available for the chair to be produced. For each item, an MRP grid should be maintained to track availability and orders. A typical MRP grid for an item is illustrated in the table below:

Lead Time 3 days, Lot size 25, Safety Stock, 0, Quantity on hand 60

Component Part No: Period

F131 1 2 3 4 5 6

Gross Requirements 20 30 30 20 30 20

Scheduled Receipts 50

Stock on hand 60 40 10 30 10 -20 -40

PAB 60 40 10 30 10 30 10

Net Requirements 10

Planned Order Receipts 25

Planned Order Releases

MRP calculates material s form the product structure and due dates. Capacity checks are then used to ensure the MRP calculations are valid and achievable.

Low-Level Codes Each level of the BOM can be identified by a level code. Usually the final product is set at level 0. The items at the next level of the BOM (the base, seat and back components shown in Figure 2 on page 11) are level 1. Level 2 contains items needed to produce level 1 items and so on.

These codes are used in low-level coding. The low level code for any item is the lowest level of any BOM that uses that item. Net requirements for that item are not calculated until all gross requirements have been calculated down to that level.

Low-level coding is used as a signal to the software to begin computing requirements for each item .Some bills of material have many items and the software recomputes net requirements frequently. Use of the low level code eases and speeds computations.

The following graphic illustrates a three level BOM:

Chair 100

Chair 100

Base 200

Base 200

Seat 622

Seat 622

Back 500

Back 500

Legs (4) 201

Legs (4) 201

Braces (2) Braces (2) 203

Frame 629

Frame 629

Seat Pad 631

Seat Pad 631

Brace 512

Brace 512 Supports (5)

545 Supports (5)

545

Arms (2) 570

Arms (2) 570

Figure 3 Level Bill of Material



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Low Level Codes and Requirements Calculations

To cut out unnecessary calculations, the requirements for an item are not calculated until the low level code for that item is reached. The following example explains the concept:

Two BOMs are displayed in tabular form below, each requiring part number 9. In product B, part number 9 is at level 2 of the BOM, while in product A, it appears at level 5. The low level code for part 9 is therefore 5. MRP will not review requirements for part 9 along with other level 2 parts (3, 4, and 11) because it occurs at level 5 in product A. It will be reviewed after requirements for parts 7 and 8 have been determined.

Parent Part No: B Rocking Chair

BOM Level Part No. Description Qty UM

0 1 2 3 4 5 6 7 8 9

0 B Rocking Chair 1 EA

1 1 Base 4 EA

1 10 Leg 2 EA

2 11 Brace 1 EA

2 9 Fixing dowels 6 EA

Parent Part No: A Dresser

BOM Level Part No. Description Qty UM

0 1 2 3 4 5 6 7 8 9

0 A Dresser 1 EA

1 1 Base 1 EA

1 2 Back 1 EA

2 3 Bench 1 EA

2 4 Rack 1 EA

3 5 Glass door 3 EA

3 6 Wood door 3 EA

4 7 Shelf 2 EA

4 8 drawer 3 EA

5 9 Fixing dowels 20 EA

Figure 4 BOM for product A

The graphic to the right illustrates the netting process in MRP for the two BOMs above. Note that although item 9 appears at level 2 in product B, it is not netted until all the other parts have been netted as it occurs at the lowest level, level 5, in product A.

The low-level code of part 9 is 5.

A

1 2 1 10

B

3 4 9 11

5 6

7 8

9

0

1

2

3

4

5

A

1 2 1 10

B

3 4 9 11

5 6

7 8

9

0

1

2

3

4

5



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MRP Calculations

The calculation of material requirements begins by extracting gross requirements for items from the MPS. Then, at each level of the BOM for each item whose low level code is equal to the level at which MRP is currently being calculated, net requirements are calculated, by taking into account the gross requirements, inventory on-hand, scheduled receipts, allocations and required safety stock levels.

These net requirements are converted into planned order receipts, using the lot sizing method for the item in question. Depending on lot sizing rules, some order receipts may exceed net requirements so inventory on-hand must be increased accordingly. Planned order releases are calculated by offsetting planned order receipts by the lead time for the item in question. The planned order releases are added to the gross requirements for items at the next level of the BOM and the entire process begins again at the next level. The process is illustrated in the following graphic:

Gross Requirements

Net Requirements

Planned Order Receipt

Available Inventory

Planned Order Release

Are all periods calculated?

MPS

Allocations Available inventory

Safety Stock

Scheduled receipts

Yes

No

Go to next BOM level

Go to next period

Lot Size Lead Time

Gross Requirements

Net Requirements


Available Inventory



Level 0 Planned Order Releases


Safety Stock

Scheduled receipts

Yes

No


Go to next period

Lot Size Lead Time

BO

M L

evel

0B

OM

Lev

el 1

Gross Requirements

Net Requirements


Available Inventory





Safety Stock

Scheduled receipts

Yes

No


Go to next period

Lot Size Lead Time

BO

M L

evel

2

Gross Requirements

Net Requirements


Available Inventory



MPS


Safety Stock

Scheduled receipts

Yes

No


Go to next period

Lot Size Lead Time

Gross Requirements

Net Requirements


Available Inventory





Safety Stock

Scheduled receipts

Yes

No


Go to next period

Lot Size Lead Time

BO

M L

evel

0B

OM

Lev

el 1

Gross Requirements

Net Requirements


Available Inventory





Safety Stock

Scheduled receipts

Yes

No


Go to next period

Lot Size Lead Time

BO

M L

evel

2

Gross Requirements of Independent Demand from the MPS The following MRP grid shows gross requirements (quantities required to support parent orders) for several items. Gross requirements come from a higher level of planning. Here, they are derived from the MPS. Gross requirements for lower level items are derived from their parent products.



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Item 1 2 3 4 5 6 7 8 9

Technique : Lot for lot Gross Requirements 20 200 20

Order Quantity Scheduled Receipts

Allocated Qty Projected Avail.

Safety Stock Net Requirements

Low Level Code 0 Planned Order Receipts

Lead Time (wks) 2

A







Lead Time (wks) 1

F


Technique : Lot for lot Gross Requirements





Lead Time (wks) 1

B


Technique Gross Requirements

Order Quantity 150 Scheduled Receipts

Allocated Qty 240 Projected Avail.



Lead Time (wks) 1

D


Technique : Lot for lot Gross Requirements 20 20 20 20 20 20 20 20 20


Allocated Qty Projected Avail. 240

Safety Stock 30 Net Requirements


Lead Time (wks) 2

C


Technique : Lot for lot Gross Requirements





Lead Time (wks) 1

E


Table 1 MRP Grid



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Bill of Material for items A and F The following tables provide some BOM information for items A and F. You will need this information, as well as the information in Table 1, page 15 to answer some of the questions in this lesson.

Parent Part No: A

BOM Level Part No. (Parent) Lead time (weeks) Qty Unit of Measure

0 1 2 3 4 5 6 7 8 9

0 A 2 EA

1 B (A) 1 1 EA

1 C (A) 2 2 EA

1 D (A) 1 2 EA

2 C (B) 2 2

2 E (B) 1 3 EA

Parent Part No: F

BOM Level Part No. (Parent) Lead time (weeks) Qty Unit of Measure

0 1 2 3 4 5 6 7 8 9

0 F 1 EA

1 B (F) 1 1 EA

1 D (F) 1 1 EA

1 E (F) 1 1 EA

2 C (B) 2 2

2 E (B) 1 3 EA Figure 5 BOMS for Items A and F

Gross Requirements of Independent Demand for Service Parts Most independent demand is derived from the MPs. However, service part requirements and interplant requirements are also independent demand. Item C in the grid above is an example of service part demand, which has been forecast at 20 units per period. This forecast must be entered into the MRP system by increasing the automatically generated gross requirements for the item. MRP treats this as an increase in demand during level-by- level explosion of dependent item requirements.

Inventory Status Before the MRP can run, information on each inventory item must be input to allow for the planning of the inventory items and the calculation of net requirements. The information required, which is usually in the item master record, includes:

planning factors such as lot size, lead time and safety stock

inventory status information such as on-hand inventory, allocated inventory and scheduled receipts



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Net Requirements and Planned Orders Net requirements are determined by adding allocations to gross requirements and then reducing gross requirements, on a period-by-period basis, by available on-order inventory (scheduled receipts) and projected inventory. For each period:

Net requirements = gross requirements + allocations - (scheduled receipts + available inv.)

For item A, 10 units are required in period 4. There are no allocations, scheduled receipts or projected available inventory, so, in this case, net requirements are equal to gross requirements. When the need for an item cannot be met by projected available inventory, a new planned order is scheduled for receipt in the period where the requirement arises. In the example above, a planned order for item A is needed in period 4. Note that because the lead time for item A is 2 weeks the order must be released in period 2 to ensure it will be there when required in period 4. This planned order anticipates future needs. It is not a real released order and its priority will be automatically rescheduled by MRP logic.

2. For item A, using the data above, determine the planned order releases for each period.

1 2 3 4 5 6 7 8 Review Q

10

Period

Planned Order release

3. For item F, using the data above, determine the planned order releases for each period.

1 2 3 4 5 6 7 8 Review Q

Period


Lower Level Gross Requirements – Level 1 In the MRP grid displayed on page 15, items A and F are the parent items for items B, C, D, and E. Much of the demand for B, C, D and E is dependent on demand for A and F. Therefore, the planned order releases for A and F convert directly into gross requirements for the dependent items. (Enter figures in the MRP grid, page 15, as you work through these calculations.)

Item B Gross Requirements

Items A and F each require one item B for assembly. Therefore, the combined planned order releases for A and F will give a gross requirements figure for item B. Demand for item B is wholly dependent on demand for items A and F. So gross requirements for Item B are:

1 2 3 4 5 6 7 8 9

Item A Planned Order Release 20 200 20

Item F Planned Order Release 40 40 20

Item B Gross Requirements 20 240 40 20 20



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Item C Gross Requirements

Items requires 2 Cs at level 1 for assembly. There is no level 1 requirement for C in item F. Therefore the demand for C at level 1 is dependent on item A only. Demand for item C also includes an independent demand of 10 units per period, which must be added to the gross requirements.

This means the gross requirements for Item C will be as follows:

1 2 3 4 5 6 7 8 9

Item A Order Release (needs 2 of item C) 20 200 20

Independent demand for item C 20 20 20 20 20 20 20 20 20

Item C Gross Requirements 20 20 60 20 420 20

4. What is the gross requirement for item C in periods 7, 8, and 9?

1 2 3 4 5 6 7 8 9

Review Q 20 20 60 20 420 20

Period

Gross Requirement

Item D Gross Requirements

Item A requires 2 units of item D for assembly, while item F requires 1 item D. Therefore, the gross requirements for item D are equal to the planned order release for item F plus twice the planned order release for item A.

This means the gross requirements for Item D will be as follows:

1 2 3 4 5 6 7 8 9

Item A Order Release (needs 2 of item D) 20 200 20

Item F Order Release (needs 1 of item D) 40 40 20

Item D Gross Requirements 40 440 40 40 20

Item E Gross Requirements

At level 1, one item E is required for each item F. However, there are no requirements for item E at level 1 in the BOM for item A. Therefore, gross requirements at level 1 for item E will match the planned order releases for item F in each period.

5. What are the gross requirements for item E in each period?

1 2 3 4 5 6 7 8 9

Review Q

Period

Gross Requirement

The following page shows the MRP grid with net requirements for items A and F and gross requirements for B, C, D, and E, calculated as far as level 1 of the BOM for items A and F.



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Item 1 2 3 4 5 6 7 8 9






Lead Time (wks) 2

A

Planned Order Releases 20 200 20






Lead Time (wks) 1

F


Technique : Lot for lot Gross Requirements 20 240 40 20 20





Lead Time (wks) 1

B


Technique Gross Requirements 40 440 40 40 40


Allocated Qty 240 Projected Avail. 340



Lead Time (wks) 1

D


Technique : Lot for lot Gross Requirements 20 20 60 20 420 20 60 20 20





Lead Time (wks) 2

C







Lead Time (wks) 1

E


Table 2 MRP Grid with Level 0 net requirements and Level 1 gross requirements



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Level 1 Gross Requirements In the MRP grid displayed on page 15, items A and F are the parent items for items B, C, D, and E. Much of the demand for B, C, D and E is dependent on demand for A and F. Therefore, the planned order releases for A and F convert directly into gross requirements for the dependent items.

Figure 6 Graphical BOM for items A and F

However, some of the items at level 1 also recur further down the BOM at level 2. Therefore, while the gross requirements for B and D are accurate at this stage, further calculations must be done to achieve the correct calculations for C and E. This is because the production of item B will trigger further requirement for items C and E.

Determining Level 1 Net Requirements and Planned Orders When gross requirements for level 1 items have been posted, the net requirements for those items with a low level code of 1 can be calculated. As previously explained, net requirements are determined by adding allocations to gross requirements and then reducing gross requirements, on a period-by-period basis, by ava ilable on-order inventory (scheduled receipts) and projected inventory. For each period:

Net requirements = gross requirements + allocations - (scheduled receipts + available inv.)

Note that there is no point in netting the requirements for items C and E at this point, as we have not reached the low level code for those items yet. At this stage (level 1), net requirements can be calculated for items B and D. Net requirements can only be calculated for those items whose low level code has been reached. Where there is no net requirement, that is, available inventory and scheduled receipts combined are greater than the total gross requirements and allocations, the net requirements cell is left empty.

Item B Net Requirements

There are 200 units on hand for item B. Usually, when using a lot- for- lot ordering policy, inventory on-hand is minimal, unless due to a production overrun, higher than expected yield, customer order cancellation, or other unexpected change in circumstances. Using the formula above, the net requirements for item B in each period are set out below:

Period 1 2 3 4 5 6 7 8 9

Gross Requirements 20 240 40 20 20

Allocations (add to gross)

Scheduled receipts (subtract)

Available inventory (subtract) 200 200 180 180

Net Requirements 60 40 20 20



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Item B Planned Orders (lot for lot)

Now that the net requirements for item B are in place, it is possible to set the planned orders. As a lot- for- lot ordering policy is in place for item B, an order equal to the net requirement for each period must be scheduled to arrive in that period. As item B has a lead tie of 1 week, this means that an order for each net requirement must be released a week before it is needed. For example, the net requirement for 60 units in period 5 will be satisfied for an order placed in period 4.

The following table sets out the planned orders for item B.

Period 1 2 3 4 5 6 7 8 9


Allocations (add to gross)

Scheduled receipts (subtract)

Available inventory (subtract) 200 200 180 180


Planned Order Receipt 60 40 20 20

Planned Order Release 60 40 20 20

Item D Net Requirements

Each item A requires 2 of item D and each item F requires one item D.

Item D has inventory on-hand of 340 units. However, 240 units of this have been allocated to another order. They are still in the stock room but have been promised to another work order and are not available to use here. When calculating net requirements, the allocated quantity is treated like a gross requirement in the first period.

There is also a scheduled receipt from a previous order due in period 1 of 320 units, which must be factored in. The net requirement for period 1 is therefore gross requirements added to allocations less the sum of scheduled receipts and available inventory. In this case:

0 + 240 – 100 – 340 = 200

As the result is a negative figure there is no net requirement in period 1. However, this results in an available inventory of 200 for the next period. If there were no inventory on-hand, there would have been a net requirement of 140 units.

Using the formula above, the net requirements for item D in each period are set out below:

Period 1 2 3 4 5 6 7 8 9


Allocations (add to gross) 240 240

Scheduled receipts (subtract) 100

Available inventory (subtract) 340 340 200 160 160




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Item D Planned Orders (Specified lot size )

Unlike item B, item D has been allocated a lot size of 150. Orders for item D can only occur in multiples of 150. Where the net requirements trigger an order, but are less than the specified lot size, you increase the inventory on-hand by the amount that remains once the net requirement has been taken out of the order. Notice that the arrival of a planned order in period 6 (see below) satisfies net requirements but also results in 70 units of inventory on-hand, which is enough to cover requirements for period 6 and part of period 7. A further order receipt in period 7 will cover requirements for periods 7 and 8

As item D has a lead time of 1 week, each planned order must be released a week before it is needed.

Period 1 2 3 4 5 6 7 8 9


Allocations (add to gross) 240 240

Scheduled receipts (subtract) 100

Available inventory (subtract) 340 340 200 160 160 70 30 140 120


Planned Order Receipt 450 150

Planned Order Release 450 150

6. If the lot size for item D were reduced to 100 and all other parameters remained the same, determine the planned order releases required to fulfill gross requirements.

1 2 3 4 5 6 7 8 9 Review Q

Period

Planned order release

Level 2 Gross Requirements At this point all gross requirements, net requirements and planned order receipts have been calculated as far as possible at level 1. Planned order releases for item B in periods 4, 5, 6, and 7 lead to gross requirements for parts C and E at level 2. As 2 of item C and 1 of item E are required for every item B, the following gross requirements for C and E must be added to those already calculated at level 1.

1 2 3 4 5 6 7 8 9

Item B (needs 2 of C and 1 E) 60 40 20 20

Item C Gross Requirements 120 80 40 40

Item E Gross Requirements 60 40 20 20

The following table shows the calculations to date and posts gross requirements for parts C and E generated from the planned order releases for item B at level 1.



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Item 1 2 3 4 5 6 7 8 9

Technique : Lot for

Gross Requirements 20 200 20




Low Level 0 Planned Order Receipts

Lead Time 2

A


Technique : Lot for Gross Requirements 40 40 20





Lead Time 1

F


Technique : Lot for



Allocated Qty Projected Avail. 200 200 200 180

Safety Stock Net Requirements 60 40 20 20

Low Level 1 Planned Order Receipts 60 40 20 20

Lead Time 1

B

Planned Order Releases 60 40 20 20

Technique Gross Requirements 40 440 40 40 40

Order Quantity 150 Scheduled Receipts 100

Allocated Qty 240 Projected Avail. 340 340 200 160 160 70 30 140 100

Safety Stock Net Requirements 380 10

Low Level 1 Planned Order Receipts 450 150

Lead Time 1

D

Planned Order Releases 450 150

Technique : Lot for

Gross Requirements 20 20 180 500 60 100 60 20 20





Lead Time 2

C


Technique : Lot for Gross Requirements 60 80 60 20 20





Lead Time 1

E


Table 3 MRP: Gross requirements, net requirements and planned orders for level 1



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Item C Net Requirements

At level 2 all items with a low level code of 2 may be netted. In this example, this includes items C and E. Item C has an order quantity or lot size of 300. In addition, it has a safety stock level of 30 units. These must be taken into account when calculating the net requirements for each period.

Period 1 2 3 4 5 6 7 8 9

Gross Requirements for C 20 20 180 500 60 100 60 20 20

Available inventory (subtract) 240 220 40

Net Requirements 490 60 100 60 20 20

Item E Net Requirements

Item E has an order quantity or lot size of 280 and on-hand inventory of 240. These must be taken into account when calculating the net requirements for each period. As can be seen below, the inventory on-hand covers all requirements for E.

Period 1 2 3 4 5 6 7 8 9

Gross Requirements for E 60 80 60 20 20

Available inventory (subtract) 240 240 240 180 100 40 20

Net Requirements

MRP Exercise Using the same bill of material for items A and F as the previous example (see page 16), complete MRP calculations for the gross requirements detailed on Table 4, page 15. The gross requirements for items A and F, the independent service part demand for item C, and inventory status information for all items have been entered for you.

Follow these steps:

1. Calculate the net requirements for level 0 items A and F (net requirements = gross requirements + allocations – scheduled receipts – projected available inventory + safety stock)

2. Schedule planned order receipts for every positive net requirement, and offset order release by the lead time

3. Post Item A and F planned order releases as gross requirements to items B, C, D, and E. using the BOM information to calculate the quantities. (For example, every A requires 2 Ds)

4. Calculate the net requirements and planned order releases for item B and post these planned order releases as gross requirements to be added to existing gross requirements for C and E.

5. Calculate net requirements for items D, C and E and then determine planned order releases



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Item 1 2 3 4 5 6 7 8 9

Technique: Lot for






Lead Time 2

A


Technique: Lot for Gross Requirements 20 20 30 20





Lead Time 1

F







Lead Time 2

B




Allocated Qty 40 Projected Avail. 340



Lead Time 1

D


Technique: Lot for

Gross Requirements 30 30 20 40 40 20 30 10





Lead Time 2

C


Technique: Lot for Gross Requirements





Lead Time 1

E


Table 4 MRP Exercise



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Item 1 2 3 4 5 6 7 8 9

Technique: Lot for




Safety Stock Net Requirements 60 80 20 40 40

Low Level 0 Planned Order Receipts 60 80 20 40 40

Lead Time 2

A

Planned Order Releases 60 80 20 40 40




Safety Stock Net Requirements 20 20 30 20

Low Level 0 Planned Order Receipts 20 20 30 20

Lead Time 1

F

Planned Order Releases 20 20 30 20

Technique Gross Requirements 60 100 40 70 40 20


Allocated Qty Projected Avail. 200 200 200 140 40 50 10 110 110

Safety Stock Net Requirements 70

Low Level 1 Planned Order Receipts 120 120

Lead Time 2

B

Planned Order Releases 120 120

Technique Gross Requirements 120 180 60 110 80 20


Allocated Qty 40 Projected Avail. 340 300 300 180 260 150 70 50 50

Safety Stock Net Requirements 60

Low Level 1 Planned Order Receipts 320

Lead Time 1

D

Planned Order Releases 320

Technique: Lot for

Gross Requirements 30 150 420 80 360 100 30 10


Allocated Qty Projected Avail. 240 240 210 60 240 160 100 300 270 260

Safety Stock 30 Net Requirements 390 230 30

Low Level 2 Planned Order Receipts 600 300 300

Lead Time 2

C




Allocated Qty Projected Avail. 240 240 240 240 140 120 10 10 270 270

Safety Stock Net Requirements 140 270 10

Low Level 2 Planned Order Receipts 280 280 280

Lead Time 1

E


Table 5 MRP Results: Gross requirements, net requirements and planned orders for all items



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Summary This lesson looked in detail at the logical processes involved in material requirements planning (MRP). The system inputs and the processing required to calculate each MRP output were explained.

You should be able to:

Identify components of an MRP spreadsheet

Detail initial requirements for the planning process

Perform the netting process for a given MRP record

Explode a set of MRP records to produce a complete material plan

Explain the characteristics and workings of a rolling schedule

Describe the necessity for low-level codes

Explain how low-level codes are used

Identify alternative techniques for handling various planning factors

Further Reading Introduction to Materials Management, JR Tony Arnold, CFPIM, CIRM and Stephen Chapman CFPIM 5th edition, 2004, Prentice Hall

APICS Dictionary 10th edition, 2002 Manufacturing Planning and Control Systems, Vollmann, T.E.; W.L. Berry; and D.C. Whybark 5th edition, 2004, McGraw-Hill Production & Inventory Management, Fogarty, Donald W. CFPIM; Blackstone, John H. JR. CFPIM; and Hoffmann, Thomas R. CFPIM 2nd edition, 1991, South-Western Publishing Co., Cincinnati, Ohio



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Review The following questions are designed to test your recall of the material covered in lesson 2. The answers are available in the appendix of this workbook.

7. Which items are NOT included in the MRP grid?

A. Order quantity, safety stock, allocations, gross requirements, net requirement s

B. Forecast demand, actual demand, cumulative items available to promise

C. Low level codes, lead times

D. Scheduled receipts, planned order releases and receipts, on-hand inventory balance

8. Which of the following are requirements for MRP?

A. Inventory item identification and storage location

B. MPS and BOM information

C. Production Plan BOM information

D. RCCP and MRO lead times

9. Which is the most accurate definition of pegging?

A. A method of locking a planned order so that it will not be changed automatically by MRP logic

B. A way of identifying the lowest BOM level an item appears on, to aid MRP netting

C. A method of tracing item requirements through the BOM structure to determine the parent items that generated the demand

D. The computation of the total requirements for an item

10. Why are low level codes used?

A. To identify the length of the MRP planning horizon

B. To identify the total requirement for an item

C. To identify the parent items that generated the demand for a low-level item

D. To set the level at which all requirements for an item should be calculated in MRP



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What’s Next? Lesson 4 looked in detail at MRP logic. At this point you have completed 4 of the 9 lessons in Unit 2.

You should review your work before progressing to the next lesson which is:

Detailed Scheduling and Planning – Lesson 5 Using Outputs of MRP



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Appendix



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Answers to Review Questions

1. C

MRP is required to plan and control inventories, work orders and purchase orders and to provide accurate loading information for CRP. The scheduling of individual operations is completed at a lower level of planning.

2. Planned order releases for item A are required in periods 3, 5, and 7 to fulfill requirements in periods 5, 7, and 9 taking into account the 2 week lead time.

1 2 3 4 5 6 7 8 9

20 200 20

Period


3. Planned order releases for item F are required in periods 5, 6 and 8 to fulfill requirements in periods 6, 7, and 9, accounting for a one week lead time

1 2 3 4 5 6 7 8 9

Period


4. Item A requires 2 item Cs at level 1. Item F does not require any item Cs at level 1. Note that orders for item B will increase gross requirements for its components, items C and E. However, this is not calculated at this point.

1 2 3 4 5 6 7 8 9

20 20 60 20 420 20 60 20 20

Period

Gross Requirements

5. At level 1, each item F requires an item E. There are no level 1 requirements for item E in the BOM for A. Note that gross requirements for item E will change when level 2 requirements are calculated, as item E is a component of item B.

1 2 3 4 5 6 7 8 9

20 280 80 20 40

Period

Gross Requirements



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6. If the lot size for D is 100, an order of 400 would be required to cover demand in period 4. A further order of 100 would be required for demand in period 5. The rest of this order would cover demand in periods 6, 7 and 8.

1 2 3 4 5 6 7 8 9

400 100

Period


7. B

Cumulative available to promise, forecast demand and actual demand are all elements of the MPS grid which feeds into MRP. MRP grids show the order quantities, safety stock quantities, allocations, lead time, gross requirements, net requirements, scheduled receipts, planned order releases and receipts, and projected on-hand inventory.

8. B

MRP requirements include the following inputs: MPS, BOM for each product, inventory status, lead times, scrap, lot sizes, and safety stock levels.

9. C

Pegging is used to identify the source of item requirements. It traces the requirements for an item up to the originating requirement for the parent product. It is useful for identifying the effects of late orders on finished goods inventory. This helps the planner prioritize orders.

10. D

The low-level code for an item is the lowest level at which it is used in any BOM. MRP calculations for an item will not be netted until all gross requirements have been calculated down to that level.



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Glossary

Term Definition

bill of material (BOM)

A listing of all the subassemblies, intermediates, parts, and raw materials needed for a parent assembly, showing the required quantity of each. It is used with the MPS to determine items that must be ordered. Also called formula or recipe.

dependent demand

Demand that is directly related to or derived from the bill of material structure for another item or end product. Dependent demand should be calculated rather than forecast. Some items may have both dependent and independent demand at the same time.

independent demand

Demand for an item that is unrelated to the demand for other items. Examples include finished goods and service part requirements.

lead time Lead time is the span of time required to perform a process.

master production schedule (MPS)

The anticipated build schedule for those items assigned to the master scheduler. The master scheduler maintains this schedule and it drives material requirements planning. It specifies configurations, quantities and dates for production.

seasonality A repetitive pattern of demand from year to year or month to month (or other time period) showing much higher demand in some periods than in others.

work order An order to the machine shop for tool manufacture or equipment maintenance or an authorization to start work on an activity or product.

Material Requirements Planning (MRP)

A set of methods that calculate material requirements by exploding the bill of material data against the master production schedule requirements, taking into account inventory on hand and other inventory information. It recommends replenishment orders and dates for material and can suggest reschedule open orders when due dates and need dates are not in phase. Time phased MRP begins with the requirements of the MPS and determines the quantity of all materials requires to produce those items and the date that those materials will be required.

Inventory Stocks or items used to support production, activities that support production, and customer service. Raw materials and work- in-process inventories support production, MRO inventories are used for supporting activities, and finished goods and spare parts inventories support customer demand.

Planning horizon The amount of time a plan, such as the master schedule, extends into the future. This is usually greater than the cumulative lead time and allows for



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lot sizing of low level components. It may also allow for capacity changes at key work centers or key suppliers.

Time bucket A single cell in a spreadsheet- like grid, which is equivalent to length of time, for example, a day, or more usually a week. The cell contains all the relevant data for the specified time period, such as the total net requirement for an item in a given week.

Firm planned order (FPO)

A planned order that is frozen in quantity and time and cannot be automatically changed by the computer. FPOs are an aid for planners working with MRP to respond to material and capacity issues by firming up selected planned orders. Firm planned orders are often used to state the master production schedule.

Pegging In MRP and MPS, pegging is the ability to identify the sources of gross requirements and allocations for a given item. It is also called ‘where-used’ information

Low-level code A number attached to an item identifying the lowest level of any bill of material at which that item appears. For example, if item F101 is required in the production of G11 and G11 is required to make H28, then H28 is the parent of G11 and has a low-level code of 0. G11 has a low level code of 1 and, as it is the parent of F101, F101 occurs at level 2.

Gross requirements

The total of independent and dependent demand for a component before the netting of on-hand inventory and scheduled receipts.

Net requirements In MRP, net requirements are calculated by subtracting the level of inventory on hand and scheduled receipts from the total achieved by adding together gross requirements, allocations and safety stock. Net requirements are converted into planned orders by applying lot sizing and lead time parameters.

Scheduled receipts

Open orders that have been assigned a due date

Projected available balance

An estimate of inventory balance in the future. It is a running sum of on-hand inventory minus requirements plus scheduled receipts and planned order receipts.

Planned order receipts

The quantity planned to be received at a particular time as a result of a planned order release. Planned order receipts are not scheduled receipts as they have not been released.

Planned order release

The date at which a planned order will be released. This is calculated by MRP by processing net requirements against lot size and lead time parameters. Planned orders are created by the computer and exist only in the computer. They may be changed or deleted during subsequent MRP processing or if circumstances change. Planned orders at one level become the gross requirements for items at the next level.



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Order quantity Order quantity or lot size is the amount of an item that is ordered or issued as a standard quantity to the production process

Lot for lot A lot-sizing technique that generates planned orders equal in quantity to the net requirement for each period.

Allocated quantity

The amount of an item that has been assigned to a specific order but has not yet been released from the stockroom to the production floor.

Safety stock An amount of stock that is held in inventory to protect against fluctuations of demand or supply. In master production scheduling, it is the additional inventory and capacity planned as protection against forecast errors.

Lead time The amount of time needed to perform a process. It is also considered to be the amount of time between recognition of the need for an item and the receipt of an order for that item. Lead time can include order preparation time, queue time, processing time, move time and receiving and inspection time.

Documents

Detailed Scheduling and Planning (Lesson 4)